Opinion: Investor greed underlies financial system fiasco

Before we spend too much time in the bank-bailout hearings arguing about CEO salary caps and the types of hedge funds to be banned, let's think about root causes of our current mess.

Before we spend too much time in the bank-bailout hearings arguing about CEO salary caps and the types of hedge funds to be banned, let's think about root causes of our current mess, shall we? The continued search for one bubble market after another is indicative of not just an interest in exploiting subprimes or playing fast and loose with derivatives, but of heightened expectations over how the global financial system can be hijacked.

What is required is putting generic brakes on how investors can approach any target market. How about banning any sustained profit margins above some arbitrary cap like 12 percent? Socialism, you say? No more so than nationalizing an insurance giant like AIG. Something tells me even Adam Smith might understand that.

Before the savings and loan shell games and leveraged buyouts of the mid-1980s, investors were happy with regular profit margins for goods and services in the 5 percent to 8 percent range, with occasional surges when a buying craze hit anything from tulips to Teenage Mutant Ninja Turtles. The important thing was, the surges were related to specific goods and services over which the public at large went temporarily mad.

The common thread in short-sells, derivatives, collateralized debt obligations, hedge funds, vendor-financed Internet infrastructure, commodities speculation and so on is that investors seek and expect continuous profits in the 12 percent to 20 percent range. These kinds of expectations killed the media industry. And in the case of financial instruments, investors are seeking profits from bets waged on future market behavior, not on tangible goods and services. Excess profits are being conjured out of thin air. Sounds like a RICO violation to me!

Wait a minute, you say—how can excess greed be criminalized? Doesn't that destroy capitalism? Hell, no. Regulation of externalities like labor rights and environmental factors not only has a long history, it's been critical to controlling capitalism to prevent it from being self-destructive. China's recent experience losing control over additives in its food supply shows that early U.S. efforts like the Pure Food and Drug Act of 1906 were key to taming the capitalist beast.

One could even think of some clever marketing campaigns to popularize this new form of regulation. How about hauling out some Jenny Craig slim-down pictures and saying, "Wall Street: Slim down your profit footprint!"—thereby linking the notion of excess profits to the carbon-footprint concepts of the environmental movement. And, of course, using the Monopoly symbol of the angry cop to insist: "Profit margins over 12 percent? Go directly to jail!"

I disagree.
By putting a cap on profit margins at 12 percent, you would remove the incentive of the inventor to improve upon cost by any more than 12 percent. Any major discovery that would reduce the cost of a product/service by, say, 80% would immediately reduce the price of the product by 68% to keep the profit at no more than 12%. That would destroy a business if the supply/demand curve were maximized before the discovery, since the actual profit, not the percentage profit, would be significantly less. The incentive to increase margin by reducing cost- the engineer's great contribution - would be obfuscated.
I know that personally as an inventor, such a 12% rule would drive me to immediately put away my schematic design software and assembler/compiler, hang up my soldering iron for good, close up my digikey account, and call my various entrepreneur friends and tell them I'm no longer interested in working on any of the 7 or 8 next greatest "widgets". With 12 % I might be able to afford my dream home by the age of 70, and that's assuming 0 inflation, which actually may be the case given your communist approach to the free market.

The staff at EE Times should really stick to technical articles. Once they go political, they are well out of their league. The current issue is not due to greed, short sellers, speculators, or anything of the like. It's due to simple corruption in the government. Follow the money.
http://ibdeditorial.com/IBDArticles.aspx?id=307149667289804
http://www.americanthinker.com/blog/2008/09/memory_lane_lynching_franklin.html

Virtually none of the premises are correct and the conclusions would not follow even if they were. Hedge funds have the highest expectation of profit and are unregulated, yet they are weathering the current crisis better than the heavily regulated banks. Excessive and irregular monetary stimulus coupled with misguided housing policies are the problem.
Please leave economic issues to those who know something about economics.